Rising wages, stagnant sales: signs that the European transfer fee bubble is ready to burst

To be successful, a football club needs to predict where the market for both transfer fees and wages are headed over the next several years. Failure to do so results in inefficient use of resources: a team either overpays when buying an asset or fails to realize full market value when selling one. Bayern Munich’s management have always been fiscally responsible. Former club president Uli Hoeness even recently insisted that top-notch players could be acquired for less than €100 million.

Are such claims just for public consumption, or is there reason to believe that the recent, aggressive inflation in transfer fees is about to slow or reverse?

Risky as it is to predict finances in the world of football business, there are in fact reasons to believe that the sharp upswing in transfer fees seen over the past few years may be at or nearing its end, and that a levelling off or a slight decrease might occur over the next few years. Let’s have a look at some of the reasons why that might be, and then look where some of the leading indicators are pointing.

Reasons why the feast might be ending

1) Television rights increases for the English Premier League (EPL), a major inflation driver, seem to be hitting a wall. While it is not often talked about, the last television deal for domestic rights to the EPL shrank rather than grew (from $7.14 billion US to $6.33 billion US). It appears the domestic market is tapped out and, while the international market is growing, the scale and speed do not look sufficient to maintain current transfer fee inflation. International rights are not growing apace. A reported deal for broadcast rights with Facebook has fallen apart, and the projected revenue for the three-year deal for Cambodia, Thailand, and Vietnam would not have been sufficient to make a real impact in any event.

2) Wages are growing faster than revenues, and revenue-to-wage ratios are becoming less healthy. Wage inflation in the EPL looks now to be double revenue growth (15% v. 6%). Experts suggest that when it comes to a professional football team, the optimal level of wages to revenue is 60%, with 40% being too conservative (under-invested) and 90% or higher being unsustainable. The EPL average has now crept over 60% and some teams are well over that. While there are some complexities behind the number (at one point in a previous TV deal cycle, the EPL hit a 70% average and some teams’ revenues have been temporarily inflated by real estate deals), it is not moving in a healthy direction. Bayern Munich Chairman Karl-Heinz Rummenigge has clearly stated that he is more concerned about wage inflation than transfer fees. For comparison, La Liga’s ratio tends to hover around 64%, Serie A 55%, Bundesliga 48%, and Ligue 1 36%.

3) Extreme transfer fee inflation has shrunk the market for elite players to an impractically small group. Only a very small group of teams can afford to spend €60 million or more for a player. That means if you have an asset in that category, the time it takes to find a willing buyer can stretch well beyond the functional. It works just like the housing market: if you are selling a reasonably priced starter home, the property will usually sell quite quickly. If you are selling a very high-priced property, the number of possible buyers is orders of magnitude smaller, so you will usually have to wait far longer (sometimes years) to find a buyer. The number of players highly valuated by their teams seems to have outstripped the number of teams who can afford them, slowing the market for elite players. The number of high-end players who wanted to move, or whom their team wanted to sell, but who were not sold (Bale, Neymar, Dybala, and many more) suggests that the number of viable buyers is not large enough to sustain the market.

4) The pre-FFP (financial fair play) pump priming has run its course. Several well-know teams spent a great deal on player acquisitions and salaries just before FFP came into effect to “prime the pump.” The assets that were purchased during that spending spree have now depreciated in value, and the clubs can no longer simply funnel money in to replace the loss due to FFP.

Leading indicators – where are they pointing?

Since the English Championship is the gateway to the EPL, economic developments there can be considered leading indicators for financial developments at the top level. For example, a few years ago a surge of billionaire buyers snapped up Championship clubs to take a chance on moving up to the EPL because the potential profits were so great. What significant economic developments do we see in the Championship now that might tell us something about the direction of the EPL?

1) Over the last couple of years, about half of the teams in the Championship have been for sale in some way and have not sold. Investors are no longer seeing the value in these teams.

2) Championship wage-to-revenue ratios now average a suicidal 115%. That is in no way sustainable.

3) Four teams were forced to sell their stadiums in order to meet their league-mandated financial sustainability requirements. Derby, Aston Villa, Reading, and Sheffield Wednesday all sold their parks to their owners to offset significant losses. There are three serious problems with this. The first is that you can only do it once, yet the expenses continue. The second is that the team then loses the non-football income the stadium generates. The third is that the stadium prices may have been artificially inflated. In the case of Derby, the stadium had been valued at $40 million, but the non-arms-length price was $80 million. The league is investigating the transactions with no ruling yet.

The banks are turning up their noses

One final indicator that the current level of transfer fees is likely not sustainable is the fact that regular banks are no longer willing to finance the acquisition of very expensive players. A private equity company known as 23 Capital provided the financing for the purchase of Antoine Griezmann for Barcelona and João Felix for Athlético Madrid. Why did Barca have to go to a non-institutional vendor to acquire this player? Simple: the banks had already lent them some €600 million to refurbish their stadium and were not willing to extend them more significant credit.

While front page reporting focuses on transfer fees north of €100 million and large media deals, a closer look at balance sheets, financing trends, and player wages suggests that the near future may bring a levelling off of transfer inflation and perhaps even a modest retreat. Whatever happens it appears that FC Bayern are well positioned to take advantage of upcoming market changes with a significant cash reserve on hand and minimal to limit what they can pay in fees and wages.